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The Asian ripple rolls on to Latin America

While all eyes were focused on Asian stockmarkets, the fact that Latin America has had its own bungee-jumping markets went largely unnoticed.

Brazil was the worst-hit of the markets, falling by 22 per cent in a single week. When the overvalued real came under pressure from currency speculators, nervous investors began to fear a rerun of the 1994 Mexican peso crisis.

But are Brazil and its neighbours heading for further trouble or is the stockmarket slump purely a reaction to Far Eastern problems? Brazil, which, with Mexico, tends to make up the bulk of most Latin American portfolios, is seen by some as the most vulnerable.

The ripple effect of the crash in Hong Kong hit Latin America on October 23. In US dollar terms, the Brazilian market was down by 24 per cent at the end of October, compared with 19 per cent falls for Argentina and Mexico and a 10 per cent drop for Chile.

The introduction of the real as Brazil&#39s new currency in 1994 has been instrumental in reducing inflation from around 50 per cent a month to its expected figure of 5 per cent for this year. But although the real is gradually being devalued against the dollar, it is still considered up to 20 per cent overvalued. The situation has attracted currency speculators, fresh from the bloodletting in Asian markets.

The Brazilian government is believed to have spent $8bn of its $63bn foreign reserves two weeks ago to preserve the currency&#39s value. This seems to have worked for now, as last week the central bank started buying back the dollar.

President Cardoso&#39s government has also put interest rates up from a fairly high 1.5 per cent a month to 3.5 per cent a month to prevent any wholesale devaluation.

Brazil&#39s vulnerability also stems from its climbing trade and current account deficits. The current account deficit is running at $35bn a year.

Although capital inflows to Brazil, Argentina and Mexico are running at over $6bn a month, there are some doubts that this can carry on financing the shortfall as well as supporting a steady currency.

But, despite these factors, fund managers argue that the recent market falls are a reaction to Asian problems.

Perpetual Latin America fund manager Mark Turner claims that most international investors treat the emerging markets as one asset class.

He says: "While it can be argued that disappointments in Asia increase the relative attractions of the Latin American markets, the reality is that most international investors, and particularly those in the US, treat the emerging markets as one. That said, indicators of investment intentions imply some increased commitment to the region."

Invesco emerging markets fund manager Peter Jarvis says: "The markets that came off the most are those that are most easy to get out of. Brazil has got problems but will solve them. The market is incredibly volatile, moving 8 per cent a day up and down over the last month. Those kinds of trades do not worry me too much. The market is off 25 per cent over the month but this is an emerging market. When the world calms down, investors will realise its value."

The Brazilian market does appear attractive, with an average price/earnings ratio of less than 10 for 1998 and earnings&#39 growth of around 20 per cent. Before it was hit by the Asian ripple, the stockmarket had built up gains of around 50 per cent since the start of the year.

Some fund managers used the falls as a buying opportunity. The £41m Perpetual Latin American growth unit trust had moved to a maximum position of 17 per cent cash shortly before the trouble hit but is now fully invested.

Turner says: "We have bought back the big safe stuff. The fund is a little more concentrated than it was, with 55 stocks."

Hargreaves Lansdown investment manager Lee Gardhouse says the firm is prob- ably more of a buyer of Latin American funds than a seller but the majority of its clients have their exposure to the continent through emerging markets&#39 funds.

Gardhouse says: "It is probably not the place to be in the short term but, on a long-term view, things look good."

Jarvis says: "The continuing privatisation will prop things up until the election next year and the flow of foreign money into those issues will help to fund Brazil&#39s current account deficit. The consensus is that the real will hold. People do have faith in Brazil. It generally pursues mostly sensible policies but it takes a long time because of the fragmented political situation."


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